With a second round of Paycheck Protection Program (“PPP”) funding coming available last week, a large percentage of small businesses either have already received (or will soon receive) the proceeds of a PPP loan. At only one percent interest over two years, PPP loans present a great opportunity, but, obviously, businesses are most interested in the forgiveness component. Maximizing loan forgiveness is key.

Forgivable Purposes

The full amount of PPP loan principal and interest will be forgiven if the borrower does the following during the eight week period after the loan is disbursed:

• • uses the entire amount for forgivable purposes; and
  • maintains employee and compensation levels.

Forgivable purposes include:

• • payroll (as defined below);
  • costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave;
  • mortgage interest payments on a mortgage incurred prior to February 15, 2020 (but not mortgage prepayments or principal payments);
  • rent payments under a lease agreement in place prior to February 15, 2020;
  • utility payments (electricity, gas, water, transportation, telephone, and internet); and
  • interest payments on any other debt obligations that were incurred before February 15, 2020.

Payroll includes:

• • salary, wages, commissions, or similar compensation (to the extent it does not exceed $100,000 per employee on an annualized basis);
  • payment for vacation, parental, family, medical, or sick leave (excluding any amounts for which a credit is allowed under the Families First Coronavirus Response Act);
  • severance;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
  • payment of state and local taxes assessed on compensation of employees; and
  • for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment or similar compensation.

Although non-payroll expenses are included in the forgiveness calculation, only 25% of the loan forgiveness can be attributed to non-payroll expenditures. Eight weeks of payroll amounts to approximately 75% of the total PPP loan eligibility amount, so businesses without non-payroll expenses will be required to repay 25% of the loan.

Reductions in Loan Forgiveness

Even if a business uses PPP proceeds for forgivable purposes, forgiveness is reduced to the extent:

• • the business reduces full time equivalent employees during the eight week period (compared to either the period from February 15, 2019 to June 30, 2019 or the period from January 1, 2020 to February 29, 2020, as elected by the borrower); or
  • the business reduces covered employees’ wages or salaries by more than 25% during the eight week period (covered employees are employees who did not make wages or salary at an annualized rate exceeding $100,000 during any pay period in 2019).

Reductions in full time equivalent employees or salary and wages that occurred between February 15, 2020 and April 26, 2020 will not reduce forgiveness if the borrower eliminates the reductions by June 30, 2020.

Forgiveness Application

The borrower must submit an application for forgiveness to its lender at the end of the eight week period. This application must include:

• • documentation verifying the number of full-time equivalent employees on payroll and pay rates, including payroll tax filings reported to the IRS and state income, payroll, and unemployment insurance filings; and
  • documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments.

It will be far more simple for borrowers to provide this information if they begin tracking and documenting forgivable expenditures from the outset. Using a separate bank account for PPP loan proceeds may also be helpful.

Both borrowers and lenders are eagerly awaiting additional guidance from the SBA regarding forgiveness. Ruder Ware is actively monitoring the situation to keep you updated on new developments.